The Federal Deposit Insurance Corporation (FDIC) has proposed new corporate and risk governance guidelines in response to the bank failures of spring 2023. However, the Bank Policy Institute (BPI) and the American Association of Bank Directors (AABD) have raised concerns about these guidelines. In a comment letter submitted today, they argue that the proposal does not explain how its expanded board duties would enhance bank safety and soundness and fails to consider conflicts with state law.
"We recognize the importance of corporate and risk governance structures and how they further safety and soundness at covered institutions," stated BPI and AABD. They added that "the proposal, however, would create obstacles to the prudential management and performance of covered institutions . . . the proposal also lacks any cost/benefit analysis, particularly with respect to its impact on the ability of covered institutions to attract and retain qualified directors."
The proposed guidelines are said to create challenges for recruiting directors by expanding responsibilities, increasing personal liability, and introducing a requirement for director independence from both bank management and parent company boards. This approach is contrary to established principles of independence.
Additionally, the proposal is criticized for potentially distracting boards from their core functions by implying that they may need to approve all bank policies. It also requires boards to confirm compliance with all laws and regulations, which is deemed impractical.
Furthermore, BPI highlights that these guidelines override state corporate law by requiring directors to consider a wide range of stakeholders' interests. This could undermine boards' ability to fulfill their fiduciary duties under state law.
The FDIC's proposal diverges from guidance issued by other regulatory bodies like the OCC and Federal Reserve, which are tailored more closely to individual banks' business models. The FDIC's approach imposes different requirements on state non-member banks compared to national banks.
BPI argues that lessons from recent bank failures indicate insufficient focus on core financial conditions rather than processes prescribed by the FDIC’s proposal. They stress that there is no demonstrated justification for overriding foundational board responsibilities or state law principles as outlined in BPI’s Guiding Principles on Corporate Governance.
The recommendation from BPI is clear: "The FDIC should withdraw the proposal." Any reissuance should address fundamental deficiencies in process and substance first.
The Bank Policy Institute represents leading banks across America including universal banks, regional banks, and major foreign banks operating in the U.S., collectively employing nearly two million people.